India’s ‘Bribe Taxes’ and the Cost of Doing Business

January 26, 2006

One of the many hidden costs of doing businesses in developing countries is bribery. In a recent op-ed in the Hindu Business Line, Professor R. Vaidyanathan of the Indian Institute of Management-Bangalore raises a provocative question: should bribes demanded by government employees for government services be counted as part of the effective tax rate paid by companies?

From the article:

An informal survey was done over the last three years in different parts of a city to get an idea of the type of bribe taxes and to estimate the amounts changing hands…

It is estimated that for all categories, the revenue generated in one city on account of bribe taxes could be around Rs 3-5 crore a day… Based on an average of 250 days of government activity, the annual bribe tax would be at least Rs 1,000 crore. At the national level of, for say 50 cities/towns (minimal estimate) it adds up to a whopping Rs 50,000 crore.

According to the Economic Survey 2004-2005, the combined tax receipts of the Central and State governments in 2003-2004 were Rs 4,15,642 crore. If we use the thumb rule that the taxes were under-collected up to 20 per cent (again, an under-estimate), then the actual taxes would have been Rs 5,19,552 crore. The difference of Rs 1,03,910 crore arises out of bribe tax reasons.

Putting the earlier estimate of Rs 50, 000 generated in all government activities plus this estimate of Rs 1,03,910 of bribe tax in the tax departments — we get an estimate of Rs 1,53,910 as bribe taxes. This comes to more than six per cent of our national income.

This also implies that bribe taxes constitute nearly 40 per cent of those levied by the Central and State Governments. This is without taking into account the huge corporate transactions on contracts worth billions of rupees on airports, expressways, power plants, IT parks, Defence purchases, etc. If we add them all, the bribe tax collections would be at least 12 per cent of GDP, when the aggregate tax-to-GDP ratio is around 16 per cent.

This implies that on a bribe tax plus regular tax basis, our tax-GDP ratio is nearly 30 per cent which is highly comparable to many developed economies. We may conclude that our ” effective tax rate” is around 30 per cent of our national income, which is twice what is shown as ” nominal tax rate”.

The bribe tax is one of the important reasons why a large number of posts in various government departments, are apparently auctioned to the highest bidder. (Full story here.)

Here’s the accompanying table from the op-ed, listing various “bribe tax” categories identified by the author (click to enlarge):

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